A price threshold is a pricing strategy that sets the price of a product or service at a level intended to match customers' psychological willingness to make a purchase. It aims to attract customers by pricing items up to the point where further price increases would deter potential buyers.
Buyers perceive prices below price thresholds as significantly lower than they actually are. Studies find that the use of price thresholds is widespread: 30-65% of prices in the US end in the digit 9.
Price thresholds make use of the left-digit effect. As consumers read the left digit of a price first, they tend to round it to the next lowest monetary unit.
Research shows that consumers' magnitude perceptions are affected by changing the left digit and lowering a price by one cent to a ".99" ending (e.g., $3.00 to $2.99). Conversely, when a price is reduced by one cent, but the left digit does not change, consumers' magnitude perceptions are much less affected (e.g., $3.20 to $3.19).
Quantifying price threshold effects is complex and context-specific. Two studies highlight the range of results:
Establishing a price threshold makes it more challenging to raise prices above the threshold (e.g., a 99-cent store).
Depending on the industry, such as luxury goods, the company must determine whether price thresholds negatively impact the offer's perceived value.
Price thresholds can be perceived as manipulative, while more random prices like €4.57 look fairer as the vendor applied cost-plus pricing.